DMI Blog

Sarah Solon

Banking Where You Sleep

In a pretty scary story last week, the front page of the LA Times reported that many Americans fear they won't be able to keep up with their housing payments. In the recently strong housing economy, 1 out of 7 Americans bought their homes because new adjustable-rate loans had made up-front payments small enough for low- and mid-income Americans to buy. But as the housing market begins to slump - and thus as the interest rates on these loans begin to go up - more than 21% of these home-owners predict that they won't be able to make their loan payments.

It seems that in the rattled economy of the last five years, many in the middle-class watched their retirement - tied up in investments - wash away, while some, who worked at Enron, watched their's simply vanish. With the rapidly growing housing market, a safer bet seemed to be keeping your money where you can see it: your home.

Homes are not just assets, not just investment opportunities - they have become full blown bank accounts. And if more than 56% of Americans locate 50% of their wealth and financial stability in the market value of their homes - then a blow to this industry would mean a hard blow to our entire economy, with less home equity to dip into for spending. For Americans without substantial savings and who are planning to use their homes' equity for retirement, a slump in the housing sector means a whole slew of economic barriers and problems.

A particularly harrowing highlight:

"T. Darren Gillespie, 34, figures his best retirement plan is the Orange County, N.C., house that he lives in.

He said he had been saving and investing in mutual funds for 14 years but felt that he had accumulated relatively little - $35,000 in all - in those accounts. 'As hard as I've worked at it, that's all I've got,' said the self-employed contractor. 'That's not going to provide me with a whole lot for retirement.'

By contrast, Gillespie estimated that the value of his home, recently appraised at $350,000, had risen $50,000 in just three years.

'Eighty percent of my net worth is tied up in this home,' he said."

In DMI's response to this year's State of the Union Address, we warned against the bursting of the housing bubble - relating how many experts have said that it is imminent and how it will hit hardest middle-class Americans trying to pay off adjustable-rate loans. Those making over $100,000 a year are hardly ever candidates for these loans - opting instead for the traditional and much safer fixed-rate loans. When lending practices are so split along the economic ladder, the burden for an industry's slump can also be dolled out unequally. If the housing bubble bursts, it will be hard on all home-owning Americans - but it will probably push mostly those struggling under the adjustable-rate loans out of their homes and into debt.

Sarah Solon: Author Bio | Other Posts
Posted at 10:57 AM, Mar 14, 2006 in Banking | Economic Opportunity | Economy | Financial Justice | Fiscal Responsibility | Housing | Retirement Security
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